Why Online Poker Should Be Legal: Full Transcript

Kai RYSSDAL: Time now for a little Freakonomics Radio. It’s that moment every couple of weeks where we talk to – this time – Steven Levitt. He is the co-author (the other co-author) of the books and the blog of the same name. It is, of course, “the hidden side of everything.” Dubner, I guess, is out of town. Levitt, how are ya?

Steven D. LEVITT: I’m doing great.

RYSSDAL: So listen: I have a little piece of paper in front of me that says we’re going to talk about poker today. And I am shocked to find out there’s gambling going on at Freakonomics world headquarters.

LEVITT: Oh, well, poker is one of my all-time favorite things. All gambling.

RYSSDAL: Seriously?

LEVITT: Well, my father introduced me to it early on. When I was no more than five or six, he would go out and play poker with his friends. If he won, he would leave a $5 bill in the keyhole of my door. If he lost, he wouldn’t leave anything. So I very early on developed positive associations with gambling – that you only won and you never lost.

RYSSDAL: I am a little shocked to discover that you are a poker player, because really it’s a game of luck, right? I mean, you deal some cards and boom, you’re done.

LEVITT: If poker were a game of luck, I definitely would not be a fan. You wouldn’t catch me anywhere near a craps table or a roulette table. But poker is so obviously a game of skill.

RYSSDAL: That’s like a declarative statement – prove it, right? I mean, how do you know?

LEVITT: You kind of know, if you’ve ever played poker, that some guys are good at it and some guys are bad at it.

RYSSDAL: I have to say here that I’m a horrible poker player. I’m just a really bad gambler.

LEVITT: That’s good to know because I think you and I are going to have to sit down at a table next time we’re together. But beyond just experience in poker, we’ve actually written a couple of papers. One was a simple paper that looked at outcomes in the World Series of Poker. Every summer, the best poker players in the world convene and the great thing about poker tournaments is if you pay your entry fee, you get to play. You don’t have to qualify. You don’t have to be any good and a lot of bad players play along with the good players. So, not surprisingly to someone who plays poker, the good players did very well and earned positive returns and the bad players – the guys like me, who show up and think it would be fun to play with the good players – end up losing a lot of money.

RYSSDAL: Alight, so if that’s the simple paper you just described, what’s the complicated paper, in laymen’s terms?

LEVITT: So this is a special data set with 12 million hands of online poker. What makes it special is that we actually get to see the hidden cards that the players have. It was given to us by the online poker site. So we can analyze the skill of the play in a way that others have never been able to. And indeed we show in every single test that we can think of doing that skill really predominates over luck when it comes to no-limit hold ‘em poker.

RYSSDAL: So what are we supposed to take away from this? That it’s OK to do this if you know what you’re doing? But it’s not if you’re not?

LEVITT: Well, it’s a crazy, politicized issue now, which is hard to understand. Congress has made it more or less illegal to play games of luck over the internet for real money. So there’s been a lot of litigation going on. The biggest poker sites got shut down in what was called “Black Friday.”

RYSSDAL: For those of you in the game.

LEVITT: Exactly. So there’s an interesting decision handed down in a recent case by a legendary judge named Jack Weinstein, who has really turned over a lot of the existing legal thinking by judging that poker is a game of skill and looking at it in much the way an economist would look at it. So we’ve been thrust into this new world, where no one really knows what’s going to happen next with online poker.

RYSSDAL: What should happen next? Should it just be legalized? There are people who have problems with this stuff. There are gambling addicts and all that.

LEVITT: Well, what’s funny is that government has taken a hard line against online gambling. At the same time, there are state-run lotteries and there are state-approved casinos. So it doesn’t seem really that the government is morally against gambling. It seems more like the government is morally against gambling that doesn’t lead to direct revenues for the government. So, it seems to me, if the government wants to be in the business of controlling and monopolizing gambling, then the government should do a better job of putting together some good internet poker sites so that the people who want to play poker can play.

RYSSDAL: You know what I think?

LEVITT: What do you think?

RYSSDAL: I think you actually just did this research so you can play more poker. That’s what I think.

One study seemed like the Freakonomics study, while the other was easily recognizable as a failure based on horrible sample selection and size (and I only had two Statistics classes in college). Guess which one declared poker is skill?

While others had comments pointing out various flaws in the flawed study, I think I referenced most of the big flaws:

From an academic standpoint, that first study holds much more water. Large sample size taken over a length of time where skill and/or luck could be accurately determined, and using stakes that matter.

That second study fails due to a number of factors:
- Small sample size (60?!? hands, 300 players)
- “Expert” vs. “Average”? I play in a relatively small circle of players and I will vouch that, based on self-analysis we should be playing in Lake Wobegon – we’d all be above average.
- Lack of time for skill to come into play. How ofter do you read poker blogs where the writer takes it easy during the first few orbits so that they can learn about the other players? 60 hands are just 10 orbits – quick ones at that. Even playing with the folks I play with regularly I take it easy when I change tables – I need to time to read each player and see how they are thinking that night.
- Inconsequential stakes. When online money games were legal in the US, I’d play the $.01/$.02 games a whole lot looser than the $.50/$1.00 games. Having the subjects play for pennies was ridiculous. Check the last time Phil Hellmuth played in a $.05/$.10 game – he was probably still in diapers.
- Self-selected subjects. See my comment about Lake Wobegon… “Hey – I’d be GREAT for this subject ‘cuz I’m such a skilled player!” Yeah – I know half were split into “average”, but what were the factors that were used to determine expert versus average?

I am no expert, but for the past two years I’ve taken the annual “crown” in the game I play most frequently (NL Holdem tournament style with 20-40 players, results measured by wins, knockouts, relative ending place, etc.). {No applause, please… I am trying to remain humble} However, I played quite a bit during that time. This year I’ve played much less frequently, and the results show – if I make the top 20 this year I will consider it a success.

Unfortunately, the “gambling is evil” cadre will use that second, horribly designed study as “proof” that poker is a game of chance, not skill.